Expert First Impression from Steve Morris, Vice President & Associate General Counsel of the National Telecommunications & Cable Association

WASHINGTON, Friday October 28, 2011.  Vice President & Associate General Counsel of NCTA, Steve Morris gave Broadband Breakfast his first impressions on yesterday’s USF Reform Proposal.

Morris told us:

The Chairman, the commissioners, and the FCC staff, all deserve a great deal of credit for bringing this item to completion.  Universal service and intercarrier compensation are some of the most difficult, complex issues faced by the Commission and adopting an item of this magnitude is a significant accomplishment.  That we have concerns about some of the decisions made by the Commission in this order in no way diminishes our respect for its efforts and accomplishments.

On the positive side, we believe the item establishes a reasonable and workable process for transitioning to a more rational intercarrier compensation regime.  The Commission acknowledged over a decade ago that the current intercarrier compensation rules were irrational and created an environment ripe for regulatory arbitrage and disputes.  We are optimistic that the rules adopted today will help put an end to the arbitrage and the disputes.  We are particularly pleased that the item commits to placing carriers of VoIP traffic on equal footing with legacy telephone companies with respect to intercarrier compensation.

We are less enthusiastic about the universal service components of the order, which are far less ambitious than was recommended in the National Broadband Plan and the Notice of Proposed Rulemaking.  At a high level, the Commission’s “new” approach to high-cost support through the Connect America Fund is to give the incumbent phone companies preferred or exclusive access to virtually all the money.  Cable operators will be able to receive broadband support only in areas where an incumbent price cap phone company chooses not to exercise its right of first refusal (or “state level commitment” as it is now called).  This overwhelming preference for incumbent phone companies violates the universal service requirement that support be provided on a competitively neutral basis, and is a step backward from the current regime, which gave competitors an opportunity to receive support in any area where they were willing to meet the Commission’s requirements.

The degree to which the Commission has granted special treatment to large price cap phone companies is particularly disheartening.  AT&T and Verizon are the two largest telecommunications companies in America and the so-called “mid-size” price cap companies (CenturyLink, Frontier, Windstream) pay out the highest dividends among S&P 500 companies.   Given the financial strength and size of these companies, it is unreasonable and unnecessary for the Commission to give them: (1) preferential access to $1.8 billion annually in high-cost support in 100 percent of their territory through a right of first refusal; (2) recovery of as much as 90-100 percent of their access charge losses from an Access Replacement Mechanism that will increase consumers’ phone bills; and (3) exclusive access to $300 million in new high-cost support, in addition to 100 percent of their legacy support (which is phased out for competitors) before the new Connect America Fund begins.  We look forward to reading the order to see if there is a reasonable explanation for this blatant favoritism.

Although the lack of competitive neutrality is a major concern, there are a number of bright spots in the USF reforms adopted today.  The Commission proposes to eliminate support in some (but not all) areas where cable operators offer broadband without a subsidy, a policy that NCTA has advocated for many years.  The Commission also adopted a budget for the high-cost program for the first time, another longstanding NCTA policy recommendation.  Consequently, while the item is far from perfect, NCTA greatly appreciates the efforts the Commission has made to begin the process of modernizing the USF regime.